When managing your taxes, understanding the rules around setting off and carrying forward losses is crucial. Here’s a simplified guide to help you navigate these rules:
- Intra-Head vs. Inter-Head Adjustments: Before adjusting losses against income from different heads, taxpayers must first adjust losses within the same head of income.
- Speculative vs. Non-Speculative Business Losses: Losses from speculative businesses can’t be offset against any other income. However, if you incur a loss from a non-speculative business, it can be set off against speculative business income.
- Capital Gains Losses: Losses under the “Capital Gains” head cannot be set off against income from other heads. Specifically, long-term capital losses can only be set off against long-term capital gains. Short-term capital losses, on the other hand, can be set off against both long-term and short-term capital gains.
- Winnings from Games and Gambling: Any income from winnings—whether from lotteries, puzzles, races, or gambling—cannot be offset by any type of loss.
- Business of Race Horses: Losses from owning and maintaining racehorses cannot be set off against any other income.
- Section 35AD Businesses: Businesses covered under section 35AD (like cold chain facilities or warehouse operations) cannot offset their losses against any other income.
- Business Losses and Salaries: Losses from business or profession cannot be set off against salary income.
- Exempt Income: If a particular income source is exempt from tax, any losses from that source cannot be used to offset taxable income.
- Carrying Forward Losses: If a taxpayer can’t fully adjust a loss within the same year, they may carry forward the unadjusted loss to the next year.
- Filing on Time: To carry forward a loss, it’s essential that the tax return for the year in which the loss occurred is filed on or before the due date.
- Change in Shareholding: If a company that is not publicly held undergoes a significant change in shareholding, it cannot carry forward and set off losses from previous years, with some exceptions.
Inter-head Set Off
After the intra-head adjustments, the taxpayers can set off remaining losses against income from other heads.
Eg. Loss from house property can be set off against salary income.
Given below are few more such instances of an inter-head set off of losses:
Loss from House property can be set off against income under any head upto a limit of Rs. 2 lakhs.
Business loss other than speculative business can be set off against any head of income except income from salary.
One needs to also note that the following losses can’t be set off against any other head of income:
a. Speculative Business loss
b. Specified business loss
c. Capital Losses
d. Losses from an activity of owning and maintaining race-horses
e. Losses from sources of Lotteries, crosswords, Puzzles, card games, and other gambling.
f. Losses from exempted sources of income are not eligible for adjustment against taxable income.
Carry Forward of Losses
After making the appropriate and permissible intra-head and inter-head adjustments, there could still be unadjusted losses. These unadjusted losses can be carried forward to future years for adjustments against income of these years. The rules as regards carry forward differ slightly for different heads of income.
These have been discussed here:
Losses from House Property:
- Can be carried forward up to the next 8 assessment years from the assessment year in which the loss was incurred
- Can be adjusted only against Income from house property
- Can be carried forward even if the return of income for the loss year is belatedly filed.
- If individuals, HUF,AOP, BOI, opting to pay taxes under old tax regime, loss under the head income from house property firstly setoff against income from any other head to the extent of Rs 2,00,000 during the same year, unobserved loss will be carried forward to the following assessment year to be setoff against income under the head income from house property of future years.
- Under the new tax regime, loss under the head income from house property would not be allowed to be set off against income under any other head, additionally losses of the earlier years will not be allowed to the future years.
Capital Losses
- Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred
- Long-term capital losses can be adjusted only against long-term capital gains.
- Short-term capital losses can be set off against long-term capital gains as well as short-term capital gains
- Cannot be carried forward if the return is not filed within the original due date